1. (C/NF) Eight directors, including the CEO, of Algeria'snational oil company Sonatrach are under investigation forcorruption and have been fired and replaced. Industryinsiders fear company operations will soon be affected.Algeria's intelligence services are leading theinvestigation. This scandal is the latest in a dramaticallyescalating series of investigations and prosecutions that wehave seen since last year involving Algerian governmentministries and public enterprises. Significantly, many ofthe ministries affected are headed by ministers consideredclose to Algerian President Bouteflika, includingEnergy/Mines Minister Chekib Khelil. Speculation is rifethat political infighting between civilian and militaryleadership lies behind the case, but we have no hardevidence. Bouteflika's determined silence is only fuelingthe uncertainty. End summary.

Eight Senior Officials Implicated---------------------------------

2. (U) A corruption scandal has broken involving Algeria'slargest company, the state oil and gas monopoly Sonatrach.The press first reported on January 14 that an examiningmagistrate ordered Sonatrach's CEO Mohamed Meziane, VP forpipelines Benamar Zenasni, VP for upstream activityBoumediene Belkacem, and five other company executives toanswer questions concerning allegations of irregularities inthe awarding of contracts to two consulting firms owned byMeziane's sons and a supplier of security equipment. Theywere questioned for twenty hours.

3. (U) All eight Sonatrach officials were then placed underformal investigation ("judicial control") which requires aperson to report periodically to police and not leave thecountry). Some were detained. Meziane himself was placedunder judicial control; the two Sonatrach VPs were detainedin Serkadji prison. An additional Sonatrach senior official,VP for commercialization Chawki Rahal, was placed underjudicial control. Four Sonatrach directors (for socialaffairs, exploration, pipelines and transport, andcommercialization) were placed under judicial control.Meziane's two sons were detained -- some stories say, forbeing major shareholders in companies to which the Sonatrachcontracts were awarded. All efforts by defense lawyers tolift the detentions and judicial control have been rejected.Outside Sonatrach, former CEO of the bank Credit Populaired'Algerie Hachemi Meghaoui and his son were ordered detained.

4. (U) Abdelhafid Feghouli, VP for downstream operations, wasimmediately appointed acting Sonatrach CEO. The three otherVPs under suspicion have been replaced. Energy/MinesMinister Dr. Chakib Khelil, whose ministry has responsibilityfor Sonatrach, claimed in a January 17 press conference thatthe investigation had caught him unawares and that all heknew was what had been reported in the press. He has sincerefused to discuss the allegations or take responsibility forthe affair, saying February 2 that he had no details of thecharges and that he would not resign. Khelil pleaded that hewas responsible for the entire energy sector but not formanaging Sonatrach or any of the some 50 other state energycompanies under his ministry's purview. He assured the presssoon after the affair broke that Sonatrach's production wouldnot be affected and that the company would continue to carryout all projects underway. The week of January 24, the pressreported that Sonatrach lawyers would not defend thesuspects, since Sonatrach was a victim of the fraud they aresuspected of committing.

Foreign Producers Worried-------------------------

5. (C/NF) Ambassador on January 27 met XXXXXXXXXXXX

Meziane. XXXXXXXXXXXX sources tell him the issue underinvestigation is Sonatrach's granting of sole-sourcecontracts. Sonatrach's regulations specify strict conditionsfor this type of contract ("procedure R-115"). Only CEOMeziane would have had authority to authorize and approvethem.

6. (C/NF) XXXXXXXXXXXX had heard that 1,600 such contracts wereunder investigation. Some of these contracts reportedly wentthrough Meziane's sons. A few years earlier, Sonatrach hadpressed Anadarko to enter into one such contract jointly withthe U.S.-Algerian joint venture BRC (Brown and Root-Condor)to develop the el-Merk oilfield. XXXXXXXXXXXX, the contract was nevercarried out, BRC was liquidated, and Sonatrach in 2008awarded the el-Merk contract to Anadarko. XXXXXXXXXXXX stated thatthis contract was not/not one of those under investigation.(Comment: BRC, nonetheless, figures in the list of ongoinginvestigations cited in the press. End comment)

7. (C/NF) XXXXXXXXXXXX noted that Abdelhafid Ferghouli, former VPfor downstream operations now appointed interim CEO, is theone (now former) Sonatrach VP with whom Anadarko was notacquainted. XXXXXXXXXXXX doubted he would last long or beeffective in the top position. No one expects the Sonatrachexecutives under investigation to return to their previouspositions.

Continuity of Sonatrach Operations----------------------------------

8. (C/NF) Energy/Mines Minister Khelil's Jan. 17 assurancesthat company operations would be unaffected have not goneunchallenged. Several press reports sourced to industryinsiders and experts say that fear has paralyzed Sonatrachupper ranks, who are all afraid to make a decision. XXXXXXXXXXXXview paralleled this assessment, and we have heard similarviews from French -- quite concerned about Sonatrach becauseof the French oil company Total's exposure here -- and otherdiplomats. He said that all senior executives, at least inthe upstream end of operations he is familiar with, arelooking over their shoulders and afraid to make decisions orsign anything. The company would not sign amendments toXXXXXXXXXXXX insurance contracts on oil production necessitatedby the 2009 budget amendments (Complementary Finance Law) --contracts for which former VP for Upstream OperationsBelkacem was responsible. Sonatrach had contracted foreigninsurance companies to provide this insurance. Now thesecompanies were not getting paid. Before long, they wouldcease insuring XXXXXXXXXXXX production operations. If thathappened, work would stop. XXXXXXXXXXXX said XXXXXXXXXXXX fields arethe largest upstream project with foreign participation inAlgeria.

Leading Role of Algeria's Intelligence Services--------------------------------------------- --

9. (C) All papers report that Algeria's equivalent to theDNI, the Departement du Renseignement et de la Securite(DRS), which is no longer under the Ministry of NationalDefense, carried out the investigation. Although DRS' moveout of the shadows and into the limelight has beenunprecedented, its special investigative service for internalcorruption has been active for years (i.e., even as far backas the Boumedienne era). The magazine "Jeune Afrique"recently claimed, for example, that DRS had investigated 1650elected Algerian local officials (or about one out of ten)since 2002 for corruption. XXXXXXXXXXXX was well aware of DRS'involvement in the Sonatrach case and related that former VPBelkacem, in many meetings with XXXXXXXXXXXX, had been extremelycareful in what he said when others, even company waiters,were present. He was very guarded over the telephone.XXXXXXXXXXXX imputed this behavior to concern over DRSsurveillance. XXXXXXXXXXXX confided that DRS has interviewed manyof XXXXXXXXXXXX company's local staff.

Political Ramifications-----------------------

10. (C/NF) XXXXXXXXXXXX noted that no one believed Energy/MinesMinister Khelil's claims to know nothing of theinvestigation. Most believe Khelil exercised a guiding handover Sonatrach operations. XXXXXXXXXXXX noted that hisconversations with industry insiders had pointed to a cousin

of the minister known only as Hemche who was a close adviserto former CEO Meziane. His sources believed Hemche was a keydecision-maker, although Meziane did the signing. Early lastDecember, Hemche reportedly abruptly retired and took upresidence in Lugano, Switzerland.

11. (C) Ambassador noted that Algiers is swirling withspeculation about the political background of this and otherscandals affecting several government ministries and publicenterprises. Some believed it was a logical outcome ofPresident Bouteflika's oft-stated commitment to attackcorruption. Most, however, interpret the DRS move againsthigh-level Sonatrach officials -- who all owed their jobs toBouteflika-confidant Khelil -- as the military's retaliationvia the DRS against the civilian control over it thatBouteflika had imposed since his reelection to a second termin 2004.

Comment-------

12. (C) The investigation against the leadership of thecompany that finances over half the country's budget andproduces 98 percent of its export revenue has shocked thecountry and generated rampant speculation about the politicalmotivations behind it. In a country where powerrelationships and processes are opaque, speculation is asrife as hard evidence is scarce. A visiting analyst of aleading U.S. risk analysis firm told Poloff the week ofJanuary 31, for example, that all his contacts believe theDRS shaped the investigation to send a message to Bouteflika,either that he should allow relatives of leading generals agreater slice of the economic pie, or that Bouteflika'swestern Algerian "clan" should cede power back to themilitary (which many regard as dominated by easternAlgerians), or simply that the civilian-dominated authorityshould restore more behind-the-scenes influence to themilitary. Despite this theory and others we have heard, wesee no hard evidence for any particular politicalinterpretation. What is certain is that the allegedinfraction and sums involved in this corruption case may onlyrepresent the tip of an iceberg -- which was precisely thepoint of an open letter to the DRS published by a formerSonatrach VP January 30 in the French language daily "ElWatan." That article urged the DRS to look into a long listof much larger Sonatrach operations, including spot marketsales to a handful of select customers connected to seniormembers of the power structure. The U.S. risk analyst'ssources were certain the DRS planted this article as afurther warning to civilian authority.

13. (C) This case is the latest in a series of corruptioninvestigations that started to surface with increasingfrequency since last spring and which are now competing withindignation over TSA measures and Algeria's failed bid to winthe African Cup of Nations football tournament for the mainheadlines in the daily press. Two of the larger casesalready underway are alleged wrongdoing in the constructionof the East-West Highway and in the awarding of fishinglicenses to Turkish companies. Others involvestate-controlled telephone operator Algerie Telecom, BRC(mentioned previously), and the National Bank of Algeria.Few cases have yet produced a trial or conviction, helpingharden the widespread view that leading public officialscontinue to enrich themselves with impunity at publicexpense. With DRS "commissars" believed present in virtuallyevery public company or ministry front office, seniorofficials are said to be worried that every visitor,especially non-Algerians, is duly noted and reported. DRSfiles, already swollen with decades of political and personalfinancial dirt on practically all notable Algerians, are saidto be growing fatter with information on suspicious businessdealings or allegations of special favors. The big questionno one can answer definitively is whether Bouteflika isorchestrating this anti-corruption blitz, as PM Ouyahia haspublicly claimed and as would be consistent with Bouteflika'slongstanding intention, or is its ultimate target. Hissilence, noted by the press, has only fueled the speculation.PEARCE